The new US Federal Reserve chair, Kevin Warsh, faces a critical test this week amid anxiety in government bond markets over inflation and Donald Trump's tax and spending plans.
As the world's most powerful central bank prepares for its annual Jackson Hole conference, analysts said bond traders would be looking for signals from Warsh over its commitment to fighting inflation.
Investors seek 'comfort blanket'
The Trump-appointed head of the US central bank has previously signalled reluctance to "spoon-feed" financial markets over how it plans to set interest rates to keep fast-rising prices in check.
However, anxiety over Trump's handling of the economy and investor fears that his war with Iran is stoking inflation have rocked global financial markets amid a dramatic sell-off in US government bonds.
Dan Coatsworth, the head of markets at the stockbroker AJ Bell, said: "Investors will be looking for a comfort blanket when Federal Reserve chair Kevin Warsh addresses the Jackson Hole meeting."
James Smith, an economist at ING Bank, said: "By offering less commentary on where rates are headed … [Warsh] risks injecting yet more volatility into an already febrile bond market."
Speech amid market volatility
Warsh is expected to give a highly anticipated speech on Friday at the Fed's annual symposium in the Rocky Mountains resort of Jackson Hole, against a volatile backdrop in global financial markets.
The gathering of the world's most powerful central bankers in the Grand Teton national park is a blue riband event in the financial calendar, as a vital platform for the Fed chair and other top officials to signal their policymaking approach.
However, Warsh has signalled reluctance to use his speech for the "more traditional setup" of dropping hints over how the US central bank may respond to inflationary pressures when its officials next meet to set interest rates in September and December. Instead, he has said his Jackson Hole speech could be "focused on bigger questions", including concerns over productivity and demographics.
Bond market pressure
The meeting comes as selling pressure intensifies in the $30tn (£22tn) US government debt market despite efforts by the Treasury secretary, Scott Bessent, to assuage investor worries after he committed to at least double Washington's purchases of US Treasury bonds.
With investors fretting over the inflationary impact of the Iran war and the US national debt surpassing $40tn for the first time, the yield on long-term US Treasury debt at first fell, before rising back towards the highest levels since 2007.
Warsh was accused by investors of sending confusing signals in his first press conference as Fed chair in July, after he expressed his commitment to curbing inflation without giving details. The Fed held rates in July, and trading in financial markets reflects investor expectations for a hold again in September, although a rise is thought possible. Markets anticipate at least one, and possibly two, quarter-point increases by the middle of next year.
Trump, who appointed Warsh, has called on the Fed to cut rates, fuelling investor concerns over interference at the central bank.
Stephen Brown, an economist at the consultancy Capital Economics, said Warsh maintaining a tight-lipped approach could be risky. "He might even stick to the official subject of the symposium, 'Financial Innovation: Implications for Payments and Policy', in which case his speech could be something of a snoozefest. That said, even that approach would risk giving the impression that Warsh is not taking inflation risks seriously, so there could still be volatility in markets."
